NEW YORK (FORTUNE) - Here's the scene: It's 3 P.M., Wednesday, Jan. 25, in Sound Stage 7 on the studio lot of Walt Disney Co. in Burbank. Five hundred cartoon people - artists,
producers, voice artists, etc. - are jammed into the warehouse-like building, murmuring and fidgeting in anticipation.

Just yesterday, Disney (Research) CEO Bob
Iger and Pixar chairman Steve Jobs announced a surprise $7.4 billion deal in which Pixar Animation Studios, which brought the world the Toy Story movies, "Finding Nemo" and "The
Incredibles," would become a wholly-owned part of Disney.

John Lasseter in Pixar's screening room.

A PIXARESQUE TALE

John Lasseter's storybook career seems like the plot of one of his movies.

1984

Lasseter, hired by Disney in 1979 and fired in 1983, joins the computer division of Lucasfilm.

1986

Steve Jobs buys Lucas's computer group for $5 million and christens it Pixar. Lasseter completes "Luxo Jr.", an Oscar-nominated short.

1988

Pixar adds computer-animated ads to its repertoire, making spots for Listerine, Lifesavers, and Tropicana. Another short, "Tin Toy," wins an Oscar.

1991

Pixar signs a production agreement with Disney. Disney is to invest $26 million; Pixar is to deliver at least three full-length, computer-animated feature
films.

1995

Pixar releases "Toy Story," the first fully digital feature film, which becomes the top-grossing movie of the year and wins an Oscar. A week after the release,
the company goes public.

1997

Pixar and Disney negotiate a new agreement: a fifty-fifty split of development costs and profits of five feature-length movies. Short "Geri's Game" wins an
Oscar.

1998-99

"A Bug's Life" and "Toy Story 2" are released, together pulling in $1.3 billion in box office and video.

A look at the folks who find the jobs, make the deals, and handle the media. (more)

The deal is surprising because Pixar's longtime distribution pact with Disney fell apart in acrimony and is due to expire after the release in June of "Cars," a kaleidoscopic
celebration of racing, Route 66, and life in the slow lane. But in an amazing plot twist, not only is Pixar becoming part of Disney, but the upstart studio is also taking over the
creative direction of Disney's own flailing animation operations - the people in this very room! For Iger, the deal is a bet-the-house gamble to save Disney animation from creative
oblivion. It's as if Nemo swallowed the whale.

When Dick Cook, the chairman of Walt Disney Studios, introduces Pixar's John Lasseter, the man who will soon be their boss, the crowd bursts into cheers and applause that goes on
and on. The 49-year-old Lasseter is dressed in his trademark blue jeans, sneakers, and cacophonous Hawaiian-print shirt, and all he can do is blush and beam. "It was almost like a
homecoming," recalls Cook, who first met Lasseter when the two had summer jobs as ride operators at Disneyland in the late 1970s.

For Lasseter, who once got fired by Disney, it was sweet vindication. And it marked another amazing chapter in his storybook life, which resembles nothing so much as a Pixar plot
line: Protagonist follows his heart, perseveres, gets the happy ending. His peers will tell you Lasseter's an animation genius up there with Walt Disney himself. Here, the master
storyteller tells his own tale.

The beginning

The on-again-off-again discussions with Michael Eisner to get a new deal with Disney had to be the most frustrating negotiation on the planet. We would tell them what we thought was
important, and the next thing you know, what we asked for was leaked into the public. And then we had to wait months for them to come back to us with a counterproposal. It was just
crazy.

It would have been easier just to walk away, but Steve [Jobs] stayed in there for me, because I loved these characters that we have created. They're like family, like children. And
if we didn't get a deal, Disney would own our children. Who knew what they would do? These were the people that put out "Cinderella II." We believe that the only reason to do a
sequel is if you have a great story, period. It's not "Let's just keep cranking it out."

So we started talking to other studios. This was in January 2004. But later it became clear that Disney's board was getting serious about replacing Michael Eisner, so we decided to
wait and see what happened. As it turned out, I got a call from Bob Iger the day it was announced that he would take over as CEO. And that said a lot to us, because he was serious
about wanting to make a deal with us to keep distributing our films. He understood that the biggest issue for us wasn't money, but to have control of our characters.

Bob also realized immediately that Disney's reputation with families had dropped because the stuff they were making wasn't as high quality as it used to be. It was more about
quantity, not quality. I'm not exactly sure how the idea of Disney's acquisition of Pixar came up, but at first I was very nervous.

We have this precious entity that is Pixar. It's like a living organism, like we had found out a way to grow life on a planet that had never supported it before. We wondered if a
deal like this would ruin it all. But Steve said to Ed [Catmull, Pixar's founder and president] and me, "Get to know Bob Iger. That's all I can say. He's a good man."

Bob came up to my home, had dinner with me and my wife, and met my kids. And right away I realized this guy is different. It's not that he was just saying the right things. You
could feel that he meant it. I think the simplest thing was that he readily admitted what he didn't know and was comfortable with that. But he said he did know one thing: that
animation is the heart, soul, and engine that drives this train called Disney, and that it was broken, and that it needs to be fixed.

He told me his epiphany happened when Hong Kong Disneyland opened last fall, and he was there with his young kids watching the opening-day parade. He was watching all the classic
Disney characters go by, and it hit him that there was not one character that Disney had created in the past ten years. Not one. All the new characters were invented by Pixar.
That's when he made the decision. I was still nervous about how Pixar was going to change if it became a part of Disney. And Bob simply said, "This is going to be very expensive, so
it's in my best interest to do everything I can to keep it the same." He was so calm and logical. No politics, no hidden meaning. And what I realized is that Steve was right about
this guy.

A cartoon geek finds his calling

Lasseter's roots in imagination go way back to his upbringing in Whittier, Calif. He was an unexpected child, in the sense that his mother wasn't aware she was carrying twins
until shortly before giving birth on Jan. 12, 1957. (His sister Joanne is six minutes older.) Hence John's father, Paul Lasseter, always referred to his son as his "bonus baby."

"I know he's talented and all," Paul says. "But what's most amazing is how he always seems to be in the right place at the right time."

My mother was an art teacher who always surrounded us with materials, and we were constantly drawing and doing artistic things. My brother liked sewing and sculpting and making
things, and my sister sewed and painted and cooked and baked. She's a professional baker now and makes the most gorgeous sculpture-like cakes. She's the queen of wedding cakes in
the Lake Tahoe area.

But what I really loved was to watch cartoons. Even though you couldn't get me out of bed on a weekday, come Saturday morning I was up at 6:30 waiting for the farm reports to end
and for the cartoons to begin. I'd have my bowl of cereal and sit really close to the TV and watch all the cartoons until the sports came on. I even did this when I was in high
school and it was uncool. I would race home after water polo practice or whatever just to see Bugs Bunny at 4:30.

When I was a freshman in high school I read a book about the making of Disney's "Sleeping Beauty" called The Art of Animation. It was this weird revelation for me, because I hadn't
considered that people actually get paid to make cartoons. So I started writing letters to Disney Studios, saying I wanted to be an animator. They were nice and wrote back. Get a
great art education, they told me. Learn the basics of figure drawing and design and color, and then we'll teach you animation, because no one teaches that in college.

Then in my senior year I got a letter from Disney saying they were starting a Character Animation Program at the California Institute of the Arts film school and that it would be
taught by these artists from the heyday of Disney. We couldn't quite afford it, but I got a scholarship and enrolled in the very first class.

It was amazing. I had these incredible teachers, and not only were they teaching us great skills, but we were hearing their stories of working with Walt Disney. Walt and these guys
took animation from its infancy and created the art form that we know, and now these guys were handing the information to us, this group of unbelievably excited kids.

I finally realized that I wasn't the only one with this geeky love for animation. We could come out of the closet now. And all of us had the same dream: to work at Disney one day.
[His classmates included Tim Burton (director of "Corpse Bride" and others), Brad Bird ("The Incredibles"), and John Musker ("Aladdin").]

I couldn't think of anything better than working at Disneyland during the summer breaks from Cal Arts. At first I was a sweeper in Tomorrowland the summer that Space Mountain opened
[1977], and then I transferred to be a ride operator on the Jungle Cruise ride. No one really believes this, but the Jungle Cruise taught me a lot of what I know about comedy and
comic timing.

Something just clicked - the combination of having your captive audience in the boat and this script of corny jokes. Soon I learned that the worse the puns and jokes, the funnier
they could be, if you knew how to deliver them.

Another key thing that made me who I am happened that same summer. It was the year "Star Wars" came out. I went down opening weekend to Mann's Chinese Theater in Hollywood with a
friend from school, and I remember standing in line for about six hours. We finally got inside, and when that movie started you were swept away. By the end I was just shaking. I
looked around the audience, and it was families, it was teenagers, it was old people--everybody was there, and everybody was just having so much fun.

When Walt Disney was making his films he trusted his instincts and made films for himself, but they appealed to everybody, not just kids. "Snow White," the first full-length
animated feature film, was the No. 1 movie in 1938, and it entertained the broadest possible audience. So when I sat there and saw "Star Wars," I was thinking that animation could
do this too.

Winning - and losing - a dream job

"I think he benefits from being on the other side in the early part of his animation career," says Andrew Stanton, vice president of creative at Pixar and the director of
"Finding Nemo." "He knows what it's like to be reminded that you're a subordinate, that you're inferior, that you're replaceable, and that it's not about you."

That first class of animators graduated from Cal Arts in 1979, and we all were about to achieve our dream of working for Disney. But what we found when we got there was a crushing
disappointment: The animation studio wasn't being run by these great Disney artists like our teachers at Cal Arts, but by lesser artists and businesspeople who rose through
attrition as the grand old men retired. This was before Michael Eisner and Frank Wells came to Disney in 1984 and revived animation.

We were so on fire and constantly giving suggestions. It was all constructive, but the people running animation seemed to resent us. One of the directors told me, "You put in your
time for 20 years and do what you're told, and then you can be in charge." I didn't realize it then, but I was beginning to be perceived as a loose cannon. All I was trying to do
was make things great, but I was beginning to make some enemies.

And then in 1980 or 1981 I saw some video of the very beginnings of computer animation, and it was like a revelation. I wasn't really looking for them but just came across some
tapes from one of these new computer-graphics conferences. When I saw this stuff I thought, Wow, this is cool. Even though it was just spheres floating around and stuff like that.

Around that time Disney made a deal to do a live-action movie called "Tron," with some computerized special effects. I didn't work on it, but some friends did, and I saw the very
first dailies, and what I saw - the potential I saw - blew me away. Walt Disney had always tried to get more dimension in his animation and when I saw these tapes, I thought, This
is it! This is what Walt was waiting for! But when I looked around, nobody at the studio at the time was even halfway interested in it.

Tron was made by a different part of the studio, unrelated to animation. This young live-action executive named Tom Willhite picked me out of the group because I kept talking to him
about how we could use this new technology in animation. So he let me and a colleague put together a 30-second test, combining hand-drawn, two-dimensional Disney-style character
animation with three-dimensional computer-generated backgrounds.

I was so excited about the test, and I wanted to find a story that we could apply this technique to in a full-blown movie. A friend of mine had told me about a 40-page novella
called "The Brave Little Toaster," by Thomas Disch. I've always loved animating inanimate objects, and this story had a lot of that. Tom Willhite liked the idea, too, and got us the
rights to the story so we could pitch it to the animation studio along with our test clip.

When it came time to show the idea, I remember the head of the studio had only one question: "How much is this going to cost?" We said about the same as a regular animated feature.
He replied, "I'm only interested in computer animation if it saves money or saves time." We found out later that others had poked holes in my idea before I had even pitched it.

In our enthusiasm, we had gone around some of my direct superiors, and I didn't realize how much of an enemy I had made of one of them. I mean, the studio head had made up his mind
before we walked in. We could have shown him anything and he would have said the same thing.

Ten minutes after the studio head left the room I get a call from the superior who didn't like me, and he said, "Well, since it's not going to be made, your project at Disney is now
complete. Your position is terminated, and your employment with Disney is now ended."

So, yeah, I was fired. But you have to understand, I never told anybody, because this was my identity. The only thing I'd ever wanted to do was work for Disney. I was so excited,
and pushing, and I didn't play the political game. I was devastated.

I now realize all this stuff happened for a reason. As I put together my pitch for "The Brave Little Toaster," I had started looking for people who could do computer animation. That
led me to Lucasfilm, because they had this computer division that had some of the world's best computer scientists. I even went up to San Rafael and visited Ed Catmull and Alvy Ray
Smith, the two guys who started the group.

Ed and Alvy had approached Disney Studios to try get them interested in computer animation, without much success. But now they saw me inside the studio starting to talk seriously
about making films with computers, and they got excited that finally Disney might be interested. What they didn't realize was that it was really just me pushing to try to get
something going.

Soon after I was fired, I went down to a computer graphics conference at the Queen Mary in Long Beach. I'll never forget it. I saw Ed give his talk, and when he saw me he came up
all excited and asked, "How's Toaster?" All I could say was, "It got shelved." I didn't have the guts to tell him I got fired. So he asked what I was doing next, and I told him I
wasn't sure.

A little later that same day I ran into him again. He was lurking behind a column at the back of the ballroom whispering, "John, John, c'mere, c'mere." Some boring talk was going
on, so I went over to see what he wanted. And he popped the question: "How would you like to come up and help us on a project?" I couldn't believe it.

I went up to Lucasfilm for a week in December of 1983, and we started planning a cartoon called "The Adventures of Andre & Wally B", our first short film. I thought the
characters would be animated by hand and that only the background would be done by computer. But Ed challenged me.

"We're developing this new system, so why not have the computers do the characters too?" I said, "I hadn't thought of that." So that's how I came to direct what turned out to be the
very first character-animation cartoon done with a computer.

A new medium is born

Pixar's early productions were about as close to handmade as computer-generated can be. The first shorts were made by Lasseter and a handful of associates, some of whom had to
design the software before Lasseter's images could be created. "

Don't forget how visionary John was as an artist back then," says Ed Catmull. "Remember, it was only 1981 when the IBM PC first came out. Back then no one really knew what to do
with them."

There's that funny saying: "I'm sorry this letter is so long, but I didn't have time to write a shorter one." And it's so true. My older brother Jim, who passed away six or seven
years ago, was a brilliant interior designer who studied Japanese design. What he loved about their approach is that they'll design something and then they take away until they can
take away no more. We have adopted that same philosophy here in our films.

Jim influenced me in other ways too. One day he said something that really hit me: "You know, what I think makes sense in fashion design is to take a really wild fabric and then
make a classic pattern or piece of clothing with it. Either that, or you take a classic fabric and make a crazy pattern with it." He said if you design things that way, there is
something familiar for people to relate to. But if you do both - take a crazy fabric and make a crazy pattern - people can't make any sense of it.

I never forgot that. When I started working with computer animation, the medium had such a unique look to it. The guys who were writing the software were also making the demo art,
and they loved mixing crazy imagery and then putting computer music to it. So you'd watch this stuff, and it's like "boop-beep-bo-beep-beep," you know, and as cool as it is,
audiences just couldn't relate to it.

I quickly realized that this medium had a lot to offer someone like me. To do Disney-quality hand-drawn cartoons, you have to be a master of two art forms. Seriously, you have to be
able to draw like a Leonardo da Vinci or a Michelangelo. But also you have to know movement and timing and control that through 24 frames a second.

My drawing ability was good, but it wasn't great, and I found myself concentrating so much on a single drawing or frame that I wasn't thinking about animated movement, with this
fourth dimension of time. The computer changed all that, because instead of a drawing, you have a model within the computer that you just move around. It's like the difference
between typing on a typewriter when you have to use whiteout to make changes, and writing on a word processor where you can cut and paste and do all that editing so effortlessly.

I also learned how to do things that you simply couldn't do before. The classic example was our short film from 1986 called "Luxo Jr." It's only a couple minutes long, and we were
so limited by the lack of computer power that we couldn't even give the characters a background. We just locked the camera down and had this wood floor that faded off to nothing.

But what intrigued everybody was that for the first time, a computer-animated film focused on the characters and the story. Sure, they were simple desk lamps with only a minimal
amount of movement, but you could immediately tell that Luxo Jr. was a baby, and that the big one was his mother. In that short little film, computer animation went from a novelty
to a serious tool for filmmaking.

The Toy Story story

Through the late '80s and early '90s, Lasseter and his team made about one short film a year and added commercials to their repertoire. Pixar paid the rent selling animation
software, and Disney was its biggest customer. One thing led to another, and in 1991 the larger studio took a flyer and backed Lasseter's idea to make a full-length feature.

When Disney decided in 1991 to back us on "Toy Story," it was in their heyday, and they were too busy to come up to visit us [in the San Francisco Bay Area]. So we would go down to
them, and take our storyboards and show them the reels and do everything to get their approval. We were naive. All we had done was make these short films and TV commercials. We
didn't know big movies.

What was interesting is that Disney kept pushing us to make the characters more edgy. That was the word that they kept using. We soon realized this was was not a movie we wanted to
make - the characters were so "edgy" they had become unlikable. The characters were yelling, they were cynical, they were always making fun of everybody, and I hated it.

When we told the Disney people, they were about ready to pull the plug, or at least move our entire story department down there to Burbank because clearly we didn't know what we
were doing. But we asked them for one more chance to fix the story. So we called all hands on deck, stayed up all night, and redid the whole first act of "Toy Story" within two
weeks.

When we showed it to Disney, they were stunned. That taught us a big lesson. From that point on, we trusted our instinct to make the movie we wanted to make. And that is when I
started really giving our own people creative ownership over things, because I trusted their judgment more than the people at Disney.

Dream job regained

Since then Pixar has invented a brave new animated world every other year, producing nothing but blockbusters, populating Disneyland with a host of new residents, and generating
enough toys to practically earn its own aisle at Toys "R" Us. Now that he's been rehired by his former employer, Lasseter has a whole new kingdom to sprinkle with Pixar dust.

I can't tell you how thrilled I am to have all these new roles. I do what I do in life because of Walt Disney - his films and his theme park and his characters and his joy in
entertaining. The emotional feeling that his creations gave me is something that I want to turn around and give to others.

I believe in the nobility of entertaining people, and I take great, great pride that people are willing to give me two or three hours out of their busy lives. I don't want anyone to
feel they wasted any of their time or money to see one of our films or ride one of our rides or go see one of our shows.

Why? Because I love taking my family to a movie or to Disneyland. I love it. Let me tell you a funny story. I took the family to see this film one weekend - I'll go to see almost
any film that's good for the whole family. And so we're sitting there watching this film, which I won't name, and there are long stretches that are just not very entertaining. My
little son - he was probably 6 at the time - was sitting next to me, and right in the middle of this dull section, he turns to me and says, "Dad? How many letters are in my name?"

I must have laughed for five minutes. I thought, Oh, man, this movie has lost this little boy. His mind has been wandering, trying to figure out how many letters there are in his
name. So I told my wife, Nancy, what he said, and she started laughing, and then the story went down the row through my whole family, our four other sons, and we're sitting there as
a family giggling and laughing.

And I thought to myself, If ever a child anywhere in the world leans over to their daddy during one of my movies and asks, "How many letters are in my name?" I'll quit.